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Corp. Bank – Technology is the key - Views on News from Equitymaster
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  • Oct 24, 2001

    Corp. Bank – Technology is the key

    Corporation Bank, one of the premier public sector banks has beaten the street’s estimates in second quarter performance. Fueled by higher trading profits on investments (largely from government securities), the bank’s net profits jumped by 31% in 2QFY02.

    For detail financial performance click here

    During the quarter, the bank’s other income witnessed a sharp rise of 47%. As can be seen from the table, the bank made gains of Rs 654 m from sale of investments during the first half. Corp. Bank is one of the active players in the G-sec and forex market, which offered the bank splendid returns. With a favourable interest rate scenario the bank is likely to make further gains in the coming quarters from the debt markets.

    Non-interest income
    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Cash management services 129 126 -2.6% 277 249 -10.1%
    Sale of investments 110 348 218.0% 196 654 233.4%
    Forex profits 83 108 29.3% 151 201 32.7%
    Bad debts recovery 101 87 -14.1% 145 134 -7.6%
    Dividend on shares 33 71 112.3% 77 117 51.9%
    Other income 231 268 16.2% 464 486 4.8%
    Total 687 1,007 46.6% 1,309 1,839 40.5%

    However, its cash management service (CMS) business is under constant pressure with increasing competition from private sector banks. During the first half of the year, the business witnessed de-growth of 10% (turnover of Rs 376 bn). It has added 91 new clients taking the total clientele to over 1,087 companies. Although, the bank has web-enabled its CMS business, its slow adoption to technology is taking toll on this revenue stream. The bank is yet to computerize its entire branch network (90% will be done by the year-end). It also aims to launch 250 ATMs by March ’02. Unless the branches are fully networked with full computerization, it will be a tough task for Corp. Bank to start Internet banking. Going forward, it could become difficult for the bank to attract new clients, as almost all the private sector banks today offer the best services at the cost comparable to that of nationalised banks.

    Another concern, which has come up in the current quarter, is 146% jump in provision for bad debts. The bank’s gross NPAs in the first half of FY02 increased by 9% (rise was mainly from lending to sugar and chemical industries). Although, the bank increased the NPA coverage ratio to 62% by making higher provisions, net NPA ratio as a percentage of advances stood higher at 2.2% (from 2% in FY01). The bad debts recovery also declined by 14% to Rs 87 m in the current quarter. Over the past three years, the bank has maintained its net NPA ratio below 2%. However, a downtrend in the economy is affecting its asset quality, which could lead to the ratio moving up further by the year-end.

    Corp. Bank’s core business of lending is facing dismal growth rates. Interest on advances grew by just 7% in the first half while interest on others jumped by 77%. This is expected to be mainly from cash balance with the RBI. With an increase in interest rate on CRR to 6.5%, the bank expects to make additional gain of Rs 80 m. Also, reduction in CRR would release additional Rs 1.4 bn. The bank’s current yield on investment is 11.4%. If the bank’s deploys these additional funds even at yield of around 8%, it would earn income of Rs 60 m from this. The total profits from this positive monetary policy would inflate Corp. bank’s earnings by at least 4%.

    Income break-up
    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Interest on advances 2,334 2,470 5.8% 4,552 4,851 6.6%
    Income from investments 1,806 2,060 14.1% 3,733 4,050 8.5%
    Interest on others 194 345 77.3% 524 681 29.9%
    Total 4,335 4,875 12.5% 8,810 9,582 8.8%

    Among the other new developments, Corp. bank issued 23.4 m shares to LIC at a premium of Rs 186 per share. This would increase its reserves by Rs 4.4 bn and would dilute its equity capital by 19.5%. However, since shares are issued at a significant premium, the new book value would be Rs 127 (current Rs 126). This additional fund from LIC is expected to flare up the bank’s capital adequacy ratio to 17.5% (from 13.5% as on September 30, 2001). An increase in CAR is likely to supplement the bank in achieving higher growth in its business.

    At the current market price of Rs 125, Corp. Bank is trading at a P/E of 4x and Price/Book value ratio of 1x 1HFY02 annualized earnings. The trigger for the stock could come only if its speeds up its IT initiative apart from strong business fundamentals.



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